GREEN CARD HOLDER WINS MAJOR FBAR DECISION

A Mexican holder of an American green card has won a major court victory concerning the obligations and penalties of Report of Foreign Bank and Financial Accounts filing. The decision could affect similar taxpayers.

A U.S. District Court has denied the American government’s motion and granted that a green card holder with Mexican citizenship is not required to file Report of Foreign Bank and Financial Accounts (FBARs).

The U.S. District Court for the Southern District of California, in Aroeste v. United States, has denied the government’s motion for summary judgment and granted in part the motion of Alberto Aroeste.

Aroeste, who spends most of his time in Mexico City but who has a residence in the United States, had incurred penalties for non-willful failure to file FBARs for 2012 and 2013 regarding his Mexican bank accounts. He contended that he didn’t need to file FBARs because of the United States-Mexico Tax Treaty.

At one point, a district court partially stayed Aroeste while awaiting a U.S. Supreme Court decision in?Bittner v. U.S., itself a landmark FBAR case eventually decided for the taxpayer. Now experts call Aroeste a pivotal case in how tax treaties apply to FBAR obligations and penalties.

Residency

Alberto Aroeste was born in Mexico and has lived there all his life, attending school and marrying his wife of 60 years in that country. They raised three children in Mexico and he worked in that nation as an executive for Continental Can Company from 1965 to 1992. After returning to work for another Mexican corporation, he retired again prior to 2012.

He resides in Mexico where he manages his real estate and financial, banking and investment accounts. The Aroestes have lived in the same house in Mexico City for more than 50 years though have a two-bedroom country house in the State of Morelos, Mexico, which they bought in 1994. The couple also owns a condominium in Florida, bought in 1980, which they use for vacation; the most time the Aroestes have stayed in Florida in any stretch is three weeks to a month.

Alberto was encouraged in the 1980s to apply for lawful permanent residency status in the U.S. (aka a green card) to facilitate his travel to the U.S. and eligibility for Continental’s fringe benefit plan. All his significant details of residency, such as location of voting, social ties, medical care and cell phone and most financial accounts, are in Mexico.

Estela Aroeste became a naturalized U.S. citizen in November 2011 and was a citizen during the years at issue in the FBAR penalties. In the case, both parties agreed that because Estela was a citizen and “a United States person” for purposes of having to file a FBAR during the years at issue. Both sides have also agreed that the penalty for Estela should have been smaller than the amount assessed by the IRS given the Supreme Court’s holding in?Bittner. Both sides have resolved Estela Aroeste’s case for $3,533.56.

The U.S. argument

According to court records, an IRS revenue agent analyzed the Aroestes’ “relative presence” in the U.S. from 2007 to 2017 with the couple’s records, passport stamps and U.S. Customs and Immigration data, as well as records from financial institutions, credit card companies, attorneys, certified public accountants and other businesses. Analysis showed that Alberto Aroeste was in the U.S. no more than 67 days in 2012 (22% of his time) and 57 days in 2013 (19%).

Since at least 1992, Alberto has been a certified resident of Mexico for tax purposes. With respect to American tax returns, the couple was advised by prior counsel to apply for and enter into the Offshore Voluntary Disclosure Program, which they did in November 2014; they received clearance to enter the program a month later. In January 2016, new counsel for the Aroestes notified the IRS that the couple wanted to opt-out of the OVDP, citing more complete legal advice.

Two months later, the IRS asked for confirmation that the Aroestes intended to opt out. The couple responded in detail and submitted corrected returns for the 2008 through 2014 tax years reflecting application of the law under the U.S.-Mexico tax treaty (IRS Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b),” though Alberto Aroeste didn’t submit for the 2012 and 2013 tax years until October 2016).

The IRS ultimately processed the 2008 and 2011 corrected returns reflecting treaty law but later requested reversal of the processed returns and reinstatement ?of the originals. Alberto timely filed original tax returns for the tax years 2015 through 2021 reflecting the application of the treaty law and the IRS has processed and accepted those returns.

IRS examination for the 2006 through 2014 tax years continued from March 2016 until April 2020, when the IRS finally assessed the FBAR penalties at issue and more than $3 million in other, and in some cases continuing, information return penalties.

Alberto paid a small portion of the FBAR penalties and filed an illegal exaction claim. The government counterclaimed to secure a judgment for a portion of the balance that the IRS assessed.

Escape hatch

The case boils down to if Alberto Aroeste is a “United States person” for FBAR filing requirements.

The government argues he is by virtue of his green card. The plaintiffs contend that Aroeste is a Mexican resident under treaty and is disqualified from being a “United States person” under FBAR regulations.

The court determined that Aroeste had not, fundamentally, abandoned his protections under the treaty, though Aroeste did acknowledge the validity of a $1,000-per-year fine for untimely notification of Treaty protection. The U.S.-Mexico Tax Treaty, however, does contain a “tie-breaker test” to determine an individual’s residence for tax and certain information return filing requirements.

The test hinges on such factors as the location of a permanent home: The U.S. government argued that the green card gave Aroeste residence in America; Mexican law determined he was a resident of that country because he had a dwelling in Mexico and more than half of his income in the calendar year was derived from Mexican sources.?His homes outside Mexico City were only used for recreation and then for relatively short periods. Another factor is the “center of vital interests,” or personal and economic relations, which the court also determined to be, for Aroeste, Mexico.

(Court interpretation of the U.S.-Mexico Treaty often relies on language for such terms as “permanent home” and “vital interests” as intent when treaties are signed and on model language from Organisation for Economic Co-operation and Development model treaty commentary.)

“This case should be straightforward,” Aroeste’s attorneys stated. “Alberto Aroeste is Mexican and his lifestyle confirms that. Under the treaty, he should be treated as a resident of Mexico and not the United States.”

The U.S. has tax treaties with dozens of countries. Aroeste could affect millions of green card holders living outside the U.S. and for whom the American government must now respect a new level of treaty law with regard to FBAR filings.

Your tax specialist needs to stay on top of this and many other issues of wealth, foreign income and tax enforcement. If we can help, please let us know.

About the Author?

Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high net worth families and their advisors.?Alicea has more than 17 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm.?Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.

Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S.?Alicea is fluent in Spanish and has a working knowledge of Portuguese.

Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA), the International Fiscal Association (IFA), a member of Clarkson Hyde Global, a world-wide association of accountants, auditors, tax specialists and business advisors and the Global Referral Network (GRN).

Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA?Forty?Under 40 Award.?She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.?

In 2021 and 2022, Alicea was the Gold and Silver Winner, respectively, of Citywealth's Powerwomen Awards in the category USA - Woman of the Year - Business Growth (Boutique). In 2023, she continued her winning streak by receiving the Gold award for Company of the Year Female Leadership (Boutique). Furthermore, Alicea is currently listed in the Global Elite Directory 2023, which is an annual exclusive directory of the world's elite lawyers and outstanding wealth advisors advising ultra-high net-worth clients.

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